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Employers Could Face Fewer Court Battles: Supreme Court Decision Closes Loophole in Arbitration Agreements

As published in the July 19, 2010 Connecticut Law Tribune.

In today’s competitive economy, many employers try to limit litigation costs by requiring employees to sign arbitration agreements. One drawback, however, is employees may nonetheless file suit in court, forcing employers to litigate the very arbitration agreement that was supposed to keep them out of court.

Fortunately for employers, the U.S. Supreme Court on June 21 closed the court house doors to many employees looking to challenge their arbitration agreement.

In Rent-A-Center apparently anticipated that type of challenge and addressed it in the agreement with a provision that said any challenge to the enforceability of this agreement must be decided by an arbitrator. This “delegation clause,” as the Court called it, was at the heart of the Supreme Court’s opinion which focused on whether such a clause made the question of arbitrability itself arbitrable.

Rent-A-Center v. Jackson, Antonio Jackson filed an employment discrimination suit against his former employer, Rent-A-Center. When Rent-A-Center pointed to the Arbitration Agreement that Jackson signed upon hire, Jackson argued the agreement was unenforceable because it was “unconscionable,” that is, it was a take-it-or-leave-it deal he had no power to negotiate.

The Supreme Court examined two types of challenges to an arbitration agreement: One is a challenge to the enforceability of the agreement as a whole, and the other is a challenge only to the delegation clause. In a 5 to 4 ruling, the Court held that employees wishing to challenge the enforceability of the agreement as a whole must arbitrate that challenge, as long as the delegation clause is “clear and unmistakable.” Only if an employee’s challenge is directed solely at the delegation clause will a court decide it.

Clear And Unmistakable

The Court gave the following example to illustrate this distinction: an employee with an employment contract which may be invalid because it calls for outrageously low wages (e.g. $1 per hour); yet if it contains a clear and unmistakable delegation clause (an agreement to arbitrate whether the contract is valid), the employee still has to go to arbitration.

In this case, Jackson argued the arbitration agreement he signed as a condition of employment was unenforceable because it was a take-it-or-leave-it contract containing many unfair terms. However, since his arguments were directed at the entire agreement, not just the delegation clause, the Court ruled he had to go to arbitration. Only if the arbitrator decided the agreement was unenforceable could he sue in court.

The reason this decision is great for employers is that it is much harder to challenge a delegation clause than it is to challenge an entire agreement. Since arbitration agreements are often pro-employer, employees could argue they are legally too unfair by stringing the many pro-employer sections together.

On the other hand, it is difficult to argue a provision that simply says you must go to arbitration is legally unfair. As long as the language of the delegation clause is clear, and the employee is given time to consider it, a court will likely find the employee clearly and unmistakably agreed to it and require arbitration.

Employers with well-drafted arbitration agreements now risk fewer court battles when an employment-related dispute arises. Employers with arbitration agreements should have competent counsel review them to make sure they are taking advantage of this opinion. Employers who thought about using arbitration agreements but decided against them should think again and should discuss with counsel how this opinion might change their assessment.